Employee Retention Credit Update and Planning
January 15, 2026
Key Takeaways
- The Employee Retention Credit ended September 30, 2021 (December 31, 2021 for recovery startup businesses)
- Claims filed between Sept. 14, 2023, and Jan. 31, 2024 are now being processed, with the IRS focusing on highest and lowest risk claims first
- If you claimed the ERC incorrectly, you can withdraw your claim without penalties or interest if the IRS hasn’t paid it yet
- Bottom Line: Many businesses were sold ineligible ERC claims by aggressive promoters—review your eligibility carefully and act now if your claim was incorrect.
The Employee Retention Credit was one of the most valuable pandemic relief programs for businesses. The credit offered up to $5,000 per employee for 2020 and up to $7,000 per employee per quarter for the first three quarters of 2021. But the program’s complexity and aggressive marketing by ERC promoters led to widespread improper claims.
If your business claimed the employee retention credit, here’s what you need to know now.
Understanding Current ERC Processing
The IRS placed a moratorium on processing new ERC claims in September 2023 due to concerns about fraudulent filings. That moratorium has now shifted. The IRS is processing claims filed between September 14, 2023, and January 31, 2024, prioritizing the highest-risk and lowest-risk claims first.
Processing times vary significantly based on your claim’s risk profile. The IRS projects tens of thousands of low-risk claims will be paid beginning in September 2024 and throughout the fall. Higher-risk claims require additional review to confirm eligibility, and you may receive requests for documentation.
Common Signs Your ERC Claim May Be Incorrect
The IRS identified several recurring issues with improper ERC claims. Your claim may be incorrect if:
You were an essential business that could fully operate. Many essential businesses were told they qualified when they didn’t. Simply being required to have employees wear masks or wash hands doesn’t mean your operations were suspended.
You can’t document a specific government order. General recommendations or guidance don’t count. You need an actual order from a governmental authority that suspended your operations.
You claimed wages for family members. Wages paid to the majority owner’s spouse, children, siblings, parents, or certain other relatives don’t qualify as eligible wages.
You used the same wages for PPP loan forgiveness. If the Small Business Administration forgave your PPP loan, you can’t claim the ERC on those same payroll costs.
You’re a large employer who claimed wages for working employees. If you had more than 100 employees in 2019 (for 2020 claims) or more than 500 employees in 2019 (for 2021 claims), you can only claim wages paid to employees who weren’t providing services.
You claimed the credit for all available quarters. Qualifying for every quarter is uncommon and suggests your promoter didn’t properly evaluate your eligibility.
What to Do If Your Claim Was Incorrect
If you claimed the ERC but now realize you weren’t eligible, you have options.
Withdraw your claim. If the IRS hasn’t processed your claim or you received a check but haven’t cashed it, you can withdraw the entire claim without paying penalties or interest. Fax your withdrawal request to the dedicated line at 855-738-7609. Include a statement saying “ERC Withdrawal” and explain which quarters you’re withdrawing.
This option is only available if you haven’t cashed the check and aren’t under audit. You also can’t withdraw claims that were made on original tax returns—only amended returns qualify for withdrawal.
Amend your return. If you received and used the ERC funds, or if you want to reduce (but not eliminate) your claim, file Form 941-X to correct your employment tax return. The IRS won’t charge penalties or interest if you repay the credit before they contact you about the issue.
How the ERC Affects Your Income Tax Return
When you claim the ERC, you must reduce your wage expense deduction on your income tax return for the same year. Many businesses missed this requirement.
If your ERC was paid but you didn’t reduce wage expenses: Include the overstated wage expense amount as gross income on your income tax return for the year you received the ERC payment. You don’t need to amend prior-year returns.
If your ERC was denied but you already reduced wage expenses: You can increase your wage expense on your income tax return for the year the disallowance became final. Alternatively, you can amend the original return, though this isn’t required.
Protecting Your Business Going Forward
The IRS continues intensive compliance work on ERC claims. If you haven’t reviewed your claim’s eligibility, do so now with your tax advisor.
Keep detailed records supporting your claim, including the specific government order that suspended your operations, payroll records showing qualified wages, calculations proving your gross receipts decline, and documentation showing how you allocated wages between ERC and PPP.
If you receive IRS Letter 105-C disallowing your claim, respond promptly with supporting documentation if you believe you were eligible. The letter will explain your appeal rights and next steps.
The employee retention credit provided critical support to businesses during the pandemic. But aggressive promoters convinced many ineligible businesses to file claims, creating compliance risks that will persist for years. Review your eligibility now, and if your claim was incorrect, take action before the IRS does.
Need help evaluating your ERC claim or responding to IRS inquiries? Contact Wiss today for expert guidance on employment tax credits and compliance.
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